The Logit Equilibrium: A Perspective on Intuitive Behavioral Anomalies
Abstract
This paper considers a class of models in which rank-based payoffs are sensitive to small amounts of noise in decision making. Examples include auction, price-competition, coordination, and location games. Observed laboratory behavior in these games is often responsive to asymmetric costs associated with deviations from the Nash equilibrium. These payoff asymmetry effects are incorporated in an approach that introduces noisy behavior via probabilistic choice. In equilibrium, behavior is characterized by a probability distribution that satisfies a "rational expectations" consistency condition: the beliefs that determine player's expected payoffs match the decision distributions that arise from applying a logit probabilistic choice function to those expected payoffs. We prove existence of a unique, symmetric logit (quantal response) equilibrium and derive comparative statics results. The paper provides a unified perspective on many recent laboratory studies of games in which Nash equilibrium predictions are inconsistent with both intuition and experimental evidence.Download Info
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Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 332.Length: 40 pages JEL Classification: C72, C92.
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:vir:virpap:332
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Web page: http://www.virginia.edu/economics/home.html
Related research
Keywords: logit equilibrium; quantal response equilibrium; probabilistic choice; auctions.;Other versions of this item:
- Simon P. Anderson & Jacob K. Goeree & Charles A. Holt, 2002. "The Logit Equilibrium: A Perspective on Intuitive Behavioral Anomalies," Southern Economic Journal, Southern Economic Association, vol. 69(1), pages 21-47, July.
References
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